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irrational complacency we are

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    Now, 'irrational complacency'
    Tom Stevenson
    July 7, 2007

    STOCKMARKET investors are guilty of "irrational complacency", a leading equities strategist has warned in a note to clients.

    James Montier confirmed Dresdner Kleinwort's ultra-bearish credentials by accusing investors of taking a "massive bet on the death of the business cycle". Mr Montier said the pricing of emerging market shares was the latest example of the way stockmarkets around the world had lost touch with reality.

    "Emerging markets have traditionally offered a substantial discount relative to major markets," Mr Montier said. "However, this is no longer true. The emerging markets are trading on the same multiple as the developed markets. This didn't even happen at the height of the last great emerging market boom of the early 1990s."

    At the height of the dotcom bubble in 2000, developed market shares traded at more than four times the book value of companies' assets, while emerging market shares were rated at just two times assets. Today both sets of shares are valued at around 2.5 times book value, Dresdner said. "Within equity markets, the dash to trash remains the name of the game," Mr Montier added. "Regardless of which market you look at, a clear preference for high-risk, low-quality assets stands out."

    Dresdner measures investor enthusiasm for risky assets with its own "greed and fear" index. It says this measure is back to levels which have highlighted trouble ahead at previous market peaks in 1987 and 2000.

    "It shows a scale of exuberance that rarely ends well for investors. As we have noted many times before, it pays to be a contrarian with respect to this indicator," the bank said.

    The market's enthusiasm for the riskiest, most cyclical areas of the market was reflected in the outperformance of these kinds of stocks when compared with businesses with stable earnings and reliable dividends, Dresdner said.

    Telegraph, London

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